Standards become the basis for determining effective performance. Managers gather information on all parts
of business operations for which they are responsible. They compare that infor- mation against the standards to determine if performance is meeting the stan- dards. A variance is a difference between current performance and the standard.
A variance can be positive (performance exceeds standard) or negative (perfor- mance falls short of standard). Whenever a variance exists, managers must identify the reasons for the difference.
Actual performance exceeding the standard may seem to be an ideal situa- tion that requires no corrective action. However, it is important to understand why the higher-than-expected performance occurred so that it can be repeated.
Or, perhaps the positive performance in one area of the business is having a neg- ative effect on another area. In addition, managers should review the process for developing standards to see why they set the standard lower than the performance that could actually be achieved.
The greatest concern occurs when performance is lower than the standard.
That means that the company will probably not be able to perform at the expected level. It also says that there are problems between planning and implementing activities. Managers not only need to take corrective action as soon as possible to improve performance but must review procedures carefully to avoid the same problem in the future. Managers must be careful in the way they communicate the problem to employees and how they take corrective action. If employees believe the manager is blaming them for the poor performance, they may not be motivated to help solve the problem. On the other hand, if employees do not recognize the seriousness of the problem, they will continue the past level of performance, which will not result in improvement.
Monitoring all activities for which managers are responsible can take a great deal of time. Managers can use information systems to reduce the amount of time spent on controlling. Computers can monitor performance and compare it to
Chapter 14• Implementing and Controlling
Effective controlling requires that managers study a large amount of numerical data, determine its meaning, and make good deci- sions based on that information. An impor- tant business skill is understanding data presented in a number of forms—tables, graphs, charts, and even unorganized or
“raw” data. Often simple statistics are used to summarize data, such as percentages, averages, and comparisons. Managers need to understand how to review data to make sure the information is complete, unbiased, and objective. They must make sure the reports provide all the information needed to understand the situation being studied.
What experience have you had in reading and interpreting data? Have you had any coursework in statistics?
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the standard. When the computer identifies a variance, it prepares a variance report for the manager. Through the use of computer monitoring and variance reports, managers can identify problems quickly.
C H E C K P O I N T
Provide an example of each of the four types of standards.
U N D E R STA N D M A N AG E M E N T CO N C E P T S
Determine the best answer for each of the following questions.
1. The final step managers take in the controlling process is a. establishing performance standards for company goals b. measuring performance using established standards c. establishing new goals
d. taking corrective action when standards are not met 2. Consistency in products and performance is measured with a
a. quantity standard b. quality standard c. time standard d. cost standard
T H I N K C R I T I C A L LY
Answer the following questions as completely as possible.
3. Do you believe managers should perform each of the management functions in order? Why or why not?
4. Which type of standard do you believe is most important to improving the overall effectiveness of a business?
Justify your choice.
Assessment 1 4 . 3
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Chapter 14• Implementing and Controlling
1 4 . 4 Gathering and Using Performance Information
Goals
• Describe three corrective actions managers can take as part of controlling performance.
• Discuss several important areas of cost control in businesses.
Terms
• just-in-time (JIT) inventory controls
Taking Corrective Action
When managers discover that performance is not meeting standards, they can take three possible actions:
1. Take steps to improve performance.
2. Change policies and procedures.
3. Revise the standard.
If managers have planned carefully, they should be reluctant to change stan- dards. In the blanket-manufacturing business discussed earlier, managers should know from past experience whether producing 25 blankets a day is reasonable.
Only under unusual circumstances (major equipment breakdown, problems with suppliers, employee strikes, etc.) would the blanket managers reduce the standard.
However, failure to meet the goal of 1,000 blankets by the specified date will not please the customer and may result in a loss of sales.
Most often, managers need to improve performance of activities when standards are not being met. This usually means making sure that the work is well organized, that supplies and materials are available when needed, that equipment is in good working order, and that employees are well trained and motivated.
Occasionally, standards are not met because activities cannot be accomplished as planned, or policies and procedures are not appropriate. This is likely to happen when a business begins a new procedure, starts to use new equipment, or has other major changes. In this situation, managers may need to change the policies or pro- cedures that are not working in order to meet the standards. Process improvement discussed earlier usually results in policy or procedure changes.
Finally, when the managers have explored all possibilities to improve perfor- mance and it still does not meet the standards, they need to evaluate the standards themselves. Planning is usually not exact. Conditions can change between the time plans and standards are developed and the time activities are performed. Managers cannot expect that all standards will be appropriate. Managers like to raise stan- dards when they believe workers can achieve higher performance. It is difficult to make the decision to reduce standards, but that may be necessary from time to time. If a group of new employees is doing the task, performance standards may need to be reduced until the employees have had the necessary training and oppor- tunity to perfect their skills.
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When new planning procedures are used or new activities are implemented, planning is less likely to be accurate. Standards developed in those situations should be studied more carefully than the standards for ongoing activities or standards that have been developed in the same way for a long period of time.
Standards should be revised when it is clear they will not accurately reflect per- formance and attempts to improve performance have been unsuccessful. When standards are changed, the new standards and the reasons for the changes should be clearly communicated to the employees affected. Also, the procedures for set- ting standards should be revised so that standards developed in the future are more accurate.
C H E C K P O I N T
Why should managers be reluctant to change standards even when performance does not meet those standards?
Controlling Costs
All managers need to watch constantly for ways to reduce costs. Excessive costs reduce the company’s profit. There are several areas in a business where managers can anticipate cost problems and develop ways to reduce costs. They are inven- tory, credit, theft, and employee health and safety.
INVENTORY Manufacturers need to produce enough of each product to fill the orders they receive. They need enough raw materials to produce those products. Wholesalers and retailers must maintain inventories to meet their customers’ needs. In all types of businesses, if inventories are too low, sales will be lost. If inventories are too high, costs of storage and handling will increase. There may be products in inventory that are never used or sold.
In that situation, the company loses all of the money invested in those products.
Inventory control requires managers to walk a fine line. They must maintain sufficient inventory to meet their production and sales needs yet not so much that it is too costly to handle and store. They must select products to purchase that can be sold quickly at a profit. They must purchase products at the right time and in the correct quantities to minimize the company’s inventory cost.
Many companies now use just-in-time (JIT) inventory controls. JIT is a method of inventory control in which the company maintains very small inventories and obtains materials just in time for use. To set up a JIT system, managers carefully study production time, sales activity, and purchasing requirements to determine the lowest possible inventory levels. They then place orders for materials so that they arrive just as they are needed for production or to fill sales orders. Production levels are set so the company has only enough products to fill orders as they are received. Effective inventory control methods can be very compli- cated. JIT inventory management requires the close support and coop- eration of a company’s suppliers as well as the companies providing transportation services to resupply inventories.
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Inventory control is a kind of balancing act. What factors need to be in place for just- in-time inventory controls to be successful?
CREDIT Most businesses must be able to extend credit to customers. Businesses also use credit when buying products from suppliers. If the company extends credit to customers who do not pay their bills, the company loses money. Also, businesses that use credit too often when making purchases spend a great deal of money on interest payments. Those payments add to the total cost of the product and reduce profits.
Businesses must develop credit policies to reduce the amount of losses from credit sales. They must check customers’ credit history carefully before offering them credit. They must develop billing and collection procedures that will col- lect most accounts on time. The age of an account is the number of days that payment is past due. Managers need to watch the age of each credit account.
The longer an account goes unpaid, the greater the chance that the company will never collect the full payment.
Companies should buy on credit when they will lose money if they don’t make the purchase. If a production schedule cannot be maintained without the credit purchase and if the price that can be charged for the sale of the product is high enough to cover the added cost, the credit purchase should be made. Companies may also need credit to purchase expensive equipment or large orders of products and materials. But managers responsible for purchasing must control the amount of money the company owes to other businesses. It is easy to make too many pur- chases on credit. When this happens, the interest charges are very high, and the company may not have enough money to pay all of its debts on time.
Managers must be sure bills are paid on time to protect the credit reputation of the business. If the supplier offers a discount for paying cash, managers should check to see if the company will benefit from taking advantage of the discount.
Before using credit, managers should study the credit terms to see what the final cost will be. Credit can be a good business tool if used carefully but can harm the business if not controlled.
THEFT Businesses can lose a great deal of money if products are stolen. Thefts can occur in many parts of a business and can be done by employees as well as by customers and others. Businesses can lose cash, merchandise, supplies, and other resources due to theft. By establishing theft controls, businesses usually are able to reduce losses.
The theft of merchandise from warehouses and stores is a major business con- cern. Retail stores are the hardest hit by such losses. Retailers lose billions of dol- lars annually due to crime, much of which is from theft of merchandise. Shoplifting by customers and employees equals 6 percent or more of total sales each year for the typical retailer. Much of the loss occurs during the end-of-year holiday shop- ping season when stores are crowded and part-time workers are employed, but it is an ongoing and serious problem throughout the year.
Many stores, warehouses, and trucks are burglarized during the night or when merchandise is being transported. Security guards or special equipment are fre- quently used to reduce the chances of such thefts. Many companies carry insur- ance against losses, but with high loss rates the cost of insurance is very expensive.
A rapidly growing area of concern to businesses and consumers alike is com- puter and Internet fraud. Business data and personal information are held in large and small computer files. Financial records and personal identity information are moved back and forth via the Internet. Data are exchanged online as part of many business transactions. Businesses increasingly contract with specialized companies to handle activities such as order processing, customer billing, accounting, and personnel management. Businesses must carefully plan and review all procedures for gathering, storing, and exchanging data to ensure the highest level of security and to prevent data and identity theft.
Chapter 14• Implementing and Controlling
&
facts
figures
Employee theft costs employ- ers over $1 billion a week and is a major cause of small- business bankruptcies. It is estimated that 3 out of every 10 employees engage in some theft and that 95 percent of all businesses have an ongoing employee theft problem. Busi- nesses employ security special- ists, review cash handling and inventory procedures, use secu- rity cameras and other moni- toring devices, and prosecute employees guilty of theft.
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Businesses and individual computer users must apply security measures to protect
data and personal informa- tion. Have you ever experi- enced identity theft?
C H E C K P O I N T
Describe several ways that managers can reduce costs in the business by paying attention to areas where costs are often high.
HEALTH AND SAFETY Even when employees are absent from work because of sickness or injury, the company must continue to operate. Other employees must be avail- able to fill in for the absent employee or the work will go undone. Usually, the salary of both the absent employee and the substitute employee must be paid. A share of health insurance costs and other benefits are often paid by the company as well. Studies estimate that the annual costs to many businesses of employee absence and health care now exceed 20 percent of the salary paid to each employee.
An employee paid at the rate of $7.00 per hour requires an additional $1.40 each hour to pay those costs. A person earning $35,000 will add $7,000 or more to the costs of the business just for health expenses and employee absences.
The increasing cost of health insurance is causing many businesses to increase the percentage of premiums paid by employees and to drop their insurance cover- age of part-time employees. Companies are working with insurance companies to find lower-cost insurance alternatives that may reduce benefits for employees.
Many companies offer no health insurance benefits at all. The cost of health in- surance is one of the major issues facing business managers and employees today.
Many businesses have found that costs that result from health and safety problems can be reduced if managed carefully. These companies provide safety training for all employees. Work areas and equipment are inspected regularly to make sure they operate correctly and safely. Employees are provided informa- tion on ways to improve their health. Investments in fitness centers and exercise programs have resulted in lower costs for the business due to fewer medical claims and reduced employee absences.
Chapter 14• Implementing and Controlling
U N D E R STA N D M A N AG E M E N T CO N C E P T S
Determine the best answer for each of the following questions.
1. Which of the following is not one of the actions managers should take if they discover that performance is not meeting standards?
a. Take steps to improve performance.
b. Change policies and procedures.
c. Revise the standard.
d. Each of the actions is appropriate.
2. The best credit policy for a company is to a. never make purchases on credit
b. charge very high interest rates to customers to increase profits c. only buy on credit when it will lose money if the purchase isn’t
made
d. pay for credit purchases well before payment is due
T H I N K C R I T I C A L LY
Answer the following questions as completely as possible.
3. Explain the meaning of the statement “Planning is usually not exact” as it applies to evaluating performance and standards.
4. What recommendations would you make to a business to increase computer and Internet security for the business
and its customers?
Assessment 1 4 . 4
thomsonedu.com/school/bpmxtra
CHAPTER CONCEPTS
• Implementing involves communicating effectively, motivating employ- ees to do their best work, developing work teams, and managing com- pany operations.
• People choose to do things that will satisfy their needs and avoid things that don’t. Managers influence performance by providing rewards when employees accomplish work goals. Theories of motivation devel- oped by Maslow, McClelland, and Herzberg describe factors that influ- ence employee behavior.
• Change is common in organizations and managers need to help employ- ees accept change. The steps in an effective change process are planning, communicating, involving, educating, and supporting.
• Controlling ensures that company operations meet expectations.
Controlling steps are: establishing standards for goals, measuring and comparing performance against standards, and taking correc- tive action when performance falls short of standards. Common types of standards are quantity, quality, time, and cost standards.
• To help the company make a profit, managers must control costs.
Areas commonly monitored for cost control are inventory, credit, theft, and employee health and safety.
REVIEW TERMS AND CONCEPTS
Write the letter of the term that matches each definition. Some terms will not be used.
1. Group of individuals who cooperate to achieve a common goal 2. Wanting to influence and control others and be responsible for a
group’s activities
3. Difference between current performance and the standard 4. Standard that describes expected consistency in production or
performance
5. Job factors that dissatisfy when absent but do not contribute to satisfaction when they are present
6. Set of factors that influence an individual’s actions toward accom- plishing a goal
7. System in which the company maintains very small inventories and obtains materials just in time for use
8. Taking personal responsibility for work, setting personal goals, and wanting immediate feedback on work
9. Standard that establishes the expected amount of work to be completed
10. Efforts to increase the effectiveness and efficiency of specific business operations
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C H A P T E R 1 4 A S S E S S M E N T
a. achievement need b. affiliation need
c. hygiene factors d. just-in-time (JIT)
inventory controls e. motivation f. motivators g. power need
h. process improvement i. quality standard j. quantity standard k. variance
l. work team
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